One of my favorite microcap success stories is that of WPP – a British multinational advertising and PR company that grew from public shell to the world’s largest advertising agency through an aggressive acquisition strategy.
WPP stands for “Wire and Plastic Products”, a public company founded in 1971 as a manufacturer of wire shopping baskets.
In 1985, “With help from a stockbroker“, Martin Sorrell (founder and current CEO of WPP) “looked for a small, publicly traded business that [he] could take over as a shell company and grow by acquisitions into a major global marketing organization.” The company they decided on was Wire and Plastic Products and “It was worth about $1.3 million at the time.”
In 1986, Sorrell took over WPP and made 18 acquisitions in his first 2 years as CEO. Sorrell’s acquisition strategy focused on firms specializing in, what are known in the industry as, “below the line” marketing functions.
After the first 18 acquisitions, WPP went on to make more acquisitions including the acquisitions of J. Walter Thompson (for $566m in 1987), Ogilvy Group (for $864m in 1989), Young & Rubicam (for $5.7 billion in 2000), and AKQA (for $540 million in 2012).
Today, WPP is worth about $30 billion and does over $10 billion in annual revenues. Sorrell continues to serve as CEO of the company. He was also knighted in 2000 and, in 2007, Sorrell was awarded the Harvard Business School’s highest honor, the Alumni Achievement Award.
The Sorrell and WPP story provides a lot of great insights for entrepreneurs and especially for microcap management teams. Below are 8 business lessons I learned from studying WPP and Martin Sorrell.
1. Build Your Reputation – Sorrell says “My father had always told me that I needed to build a reputation in an industry before going out on my own. By 1985 I was 40 years old, I had a $2 million stake in Saatchi & Saatchi, and I had built the reputation I needed.” When Sorrell was Saatchi’s group finance director (from 1977 to 1984) he designed and carried out many of Saatchi’s agency acquisitions.
2. Put Your Money Where Your Mouth Is – Sorrell leveraged his stake in Saatchi to get a loan to purchase his initial stake in Wire and Plastic Products. Sorrell says in his HBR piece “When I first invested in this company, I took a gamble with my $325,000… The only time I ever sold shares was to fund my divorce, so all my wealth is tied up in WPP. That’s the way I like it.“
3. Boring Can Be Profitable – In Sorrell’s first two years as CEO, WPP made 18 acquisitions. These first acquisitions focused on firms specializing in what are called ‘below the line’ marketing functions. Sorrell describes ‘below the line’ as “the unfancy, unsexy stuff—packaging, design, promotions. Below-the-line agencies never get much attention, but they can be good businesses.” Not only did WPP’s revenues and market share grow but its market cap did too. Sorrell says, “The stock market liked our strategy, and our market cap kept growing.“
4. Use Stock For Acquisitions – WPP’s first 18 acquisitions included 15 UK and 3 US companies to become the largest ‘below the line’ business on either side of the Atlantic. Sorrell says they completed those first 18 acquisitions “using mostly our shares as financing“. After the first 18 acquisitions, WPP was worth about $250 million. They then purchased JWT for $566M (half cash, half stock) and two years later they acquired Ogilvy & Mather in adeal worth $850 million (half in cash, half in convertible preferred stock).
5. It’s Better To Have a Small Piece of a Big Pie – Today, WPP is worth $30 billion and Sorrell owns 2% of it. Sorrell’s use of stock to complete acquisitions often diluted his ownership but increased the value of his smaller stake. For example, when WPP was worth about $250 million, he acquired JWT for $566M, half cash, half stock – in this instance Sorrell gave up nearly half of his company but increase the value of the company by more than 3x. 2% of a $30 billion company ($600M) is worth a lot more than 100% of the $1.3M shell!
6. Invest In Your People – As the parent company of all of these acquired businesses, WPP was always looking to add value as a parent. One of the top ways WPP does this is by investing in their people. WPP invests in their people a number of ways including; a fellowship program that “is regarded as the industry’s gold standard and is harder to get into than Harvard Business School“, the Leadership Equity Acquisition Plan (“LEAP”) in which top operating and parent company executives are offered an opportunity to invest their own money in WPP shares and are “paid out a multiple of that investment over a number of years—if WPP’s share price outperforms its peer group“, and more!
7. Embrace Change – As a result of a recession immediately following the Ogilvy & Mather acquisitions, Sorrell had what he calls his “come-to-Jesus moment” that forced him to reconsider what WPP needed to do to fuel growth. Some of those changes WPP made to fuel growth include early entrance into BRIC countries a focus on digital earlier than their competitors. In 2000 about 12% of WPP revenue was coming from Brazil, Russia, India, and China and today nearly 1/3 comes from ‘fast-growth economies’. Digital accounts for as much as 40% of WPP revenue today and Sorrell says that “someday that will probably be 100%.“
8. Dream Big – When Sorrell took control of a public shell worth $1.3M he had no clear idea how big the firm would become, he says, but knew he wanted to do something of size. “I didn’t want, forgive the phrase, a Mickey Mouse kind of thing: I wanted to do something of scale. Putting it grandly, from an intellectual point of view, I thought it interesting.“
If you want to learn more about WPP/Sorrell’journey from public shell to world’s largest marketing agency, Sorrell penned his own piece in the Harvard Business Review titled; “WPP’s CEO on Turning a Portfolio of Companies Into a Growth Machine” and The Guardian has a great piece titled; “Sir Martin Sorrell: advertising man who made the industry’s biggest pitch“.
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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